Sunday, November 15, 2020

The Technology’s Effect

 The transformation of the global economy from an agricultural to an industrial firstly and after to a high technological economy lasted at least 3,5 centuries with the peaking the invention of internet in nineties of twentieth century and the foundation of social media companies, which changed radically the way people communicate nowadays.

However, this amazing evolution of the mankind has created threats and also opportunities in the global economy, but the problem of not equal participation in the technology effect from all the countries of the world remains and is the main cause of the disequilibria in the global economy and in the global monetary system.

According to the economic theory, the capital deepening, meaning the continuous increase in the fixed capital expenditures leads to  higher economic growth until the point where the marginal revenue of the product equals to the marginal cost of the product, but the investment in technology leads to a permanently higher growth rate because the marginal revenue of product increases while the product’s marginal cost remains unchanged.

USA is the global leader in high tech investments and has achieved to create the most innovative companies in the world. The characteristics of US economy that differentiate it from the rest of the world is its common law system, the big development of venture capital, the low level of corporate finance of innovative companies from the US banking system, the big investment from USA’S government fiscal budget in the highest quality of education, its huge military power and the high level of technological and financial literalism of its citizens, one of the highest in the world.

On the other hand, Emerging countries’ economies and European countries do not possess the previous referred characteristics of US economy, with having as a result the low technological development of the rest of the world, the scarcity of the same degree of innovation and economic growth, the existence of big dependence from US technology spillover effects and the low impact of technology in the economic activity, economic growth and competitiveness. So, due to the technological superiority and higher quality of USA economic structure, the rest countries of the world are forced in continuous expenditures for competing USA, but the high level of these countries’ governments debts does not permit the necessary infrastructure investments in technology. So, these countries are stuck to low growth prospects and the worst of this problem is the fact that this time US economy is one fourth of the global economy’s gross domestic product and is considered the biggest systemic risk for the global monetary and economic system, if it experiences a recession.

The technology’s effect on securities markets is unambiguous.

Firstly, it decreases the inflation premiums of government bonds and given the global quantitative easing that was implemented globally after the big financial crisis of 2008 is responsible for the very low yields in government and low credit risk corporate bonds.

Secondly, it contributes significantly in the decrease of discount rates and the outperformance of stocks, because keeps the  countries’ inflation rates low, forcing the central banks of big developed countries to keep the interest rates low.

Lastly, it keeps commodities prices and especially energy prices low, because commodities producers’ companies can borrow more cheaply in comparison to the past and increase the production, aiming for a higher market share.

Finally, the technology’s effect is responsible for the positive performance of S&P 500 index year to date, because 90% of its stock gains are owed to five highly innovative technological companies, which keep huge amounts of cash and have transformed the global technological and economic landscape.

However, the negative performance of Emerging and the most of European countries equities markets year to date does not support the continuation of US bull market in the long term, because US equities market continues to outperform discounting the technology’s effect and the expectation that USA’S real gross domestic product will continue to rise.